New General Electric CEO John L. Flannery didn’t wait long to continue predecessor Jeff Immelt’s strategy of selling off assets to sharpen its focus on industrial products.
Under Immelt, who was replaced by Flannery last month, GE signed deals to sell some $200 billion worth of businesses. On Monday, it announced the sale of the underperforming Industrial Solutions unit to Swiss engineering firm ABB Group for $2.6 billion.
GE Industrial Solutions’ products include circuit breakers, switchgear, components for lighting control, and power-supply equipment for facilities including data centers. It had revenue of $2.7 billion last year and employs about 13,500 people worldwide.
“Further sales could be in the offing — Mr. Flannery is conducting a review of each of GE’s businesses, and is expected to present his plans in November,” The New York Times reported.
GE has been streamlining its operations in the belief that it can grow faster by focusing more narrowly on heavy industrial equipment. It has also come under pressure from activist hedge fund Trian Fund Management to cut costs.
Some analysts said the price ABB is paying for GE Industrial Solutions was surprisingly high given the business’ low profitability. Its EBITA is just 6% of sales, less than half the 15% operating margin at ABB’s comparable electrification products division.
“GE Industrial Solutions isn’t in top shape, so ABB has its work cut out for it,” Richard Frei, a Zuercher Kantonalbank analyst, told Reuters.
But ABB believes it can upgrade GE’s products with its own technology and the deal will help it to better penetrate the North American market.
“With GE Industrial Solutions, we strengthen our Number 2 position in electrification globally and expand our access to the attractive North American market,” Ulrich Spiesshofer, ABB’s chief executive, said in a news release. “This transaction creates significant value for our shareholders.”
GE and ABB also agreed to a supply partnership under which where the companies would increase buying and selling from each another. “Without that, the economics wouldn’t have worked,” Spiesshofer told reporters. “With the supply partnership, the economics at the price of 0.9 times revenue is working.”